Great Wolf Buyout Game Needs High Roller All-In Bet

In spite of its loss-making ways, Great Wolf Resorts is an attractive target for a private equity buyer. Amid a sea of losses, the company has managed to generate roughly $20 million in free cash flow in recent years -- a key for private equity investors. Meanwhile, Great Wolf Resorts owns and licenses many of its 11 resorts, which featuring indoor water parks and family-styled suite lodging and restaurants.

In a March research note, Shah of Tullett Prebon said that Great Wolf Resorts' core operations, its net operating losses a tax benefit for a profitable acquirer, and its majority equity stake in Creative Kingdoms, are worth up to $8.60 a share.

Separately, Great Wolf Resorts' financial adviser Deutsche Bank(DB) noted that the company could be worth between $3.74 and $7.98 a share, according to court filings stemming from a shareholder lawsuit regarding takeover bids.

In 2011, Great Wolf Resorts saw its annual loss narrow by roughly 50% to $25 million on rising sales and overall operating profits. Still, much of Great Wolf Resorts financial stress results from a debt burden that's over $500 million. While the company turned an operating profit in 2011, its near $50 million in annual interest expense drove overall losses.

In assessing its hunger for Great Wolf after KSL's $7.25 bid, Apollo may reflect on a failed $11.50 a share bid for Cedar Fair(FUN) that it launched in December 2009. While management accepted the offer, large shareholders like Neuberger Berman and Q Investments didn't support it and Apollo withdrew in April 2010. Neuberger Berman and Scepter Holdings currently have 5.9% and 3% stakes in Great Wolf Resorts and above 12% stakes in Cedar Fair as its shares have surged to over $30 on improving financials and dividend payments.

For investors and potential acquirers, the value of Great Wolf Resorts may rest on whether bidders focus on the company's free cash flow over earnings per share losses that stretch back to 2004.